Amish Shah, who has over 17 years of experience in the capital market, is overweight on financials, industrials, materials, telecom, staples and pharma. Financials, industrials and materials particularly are our biggest OW positions, he said in an interview with Moneycontrol’s Kshitij Anand.
Shah who is an India equity strategist at BofA Securities expects an improvement in the economic growth on the back of expansionary fiscal and monetary policies, which should be positive for the Financials sector play. Edited excerpts:
Q) Which sectors are you overweight and underweight on in 2021 and why?
A) We are OW Financials, Industrials, Materials, Telecom, Staples, and Pharma. Financials, Industrials, and Materials particularly are our biggest OW positions.
Our preference for Industrials and Materials is based on our view that the capex cycle will revive this year led by a) step-up in govt. capex - we think it is very likely in the upcoming Budget, b) liquidity buffer held by corporates in FY21 now getting deployed as capex, c) improving real estate cycle and d) industrial capex kick-starting driven by govt.’s push for Make in India, improving industrial utilization, etc.
Financials are macro play and could do well on the back of lower credit costs and loan growth reviving on the back of economic revival.
The Telecom sector could see long-awaited price hikes, and for pharma, we think good margins are likely to sustain at least for another 1-2 quarters, in addition to certain stocks providing an opportunity to play the Covid theme.
We are UW on IT, Energy, Discretionary sectors. IT has reported good earnings in recent results, but we think that valuations now already price that in.
Besides peak valuations, there are no incremental positive triggers. Likely weak USD/ strong INR is a headwind as well.
For the Discretionary sector, valuations are now at an all-time high and could face risks to earnings downgrades on the back of rising commodity prices.
Q) Why do you think - the underperformer of 2020 will outperform this year? And, will IT run out of steam after the recent rally?
A) We do not think the sectors that did well last year will be the same ones that would do better again this year. There will be some rotation.
We expect improvement in the economic growth on the back of expansionary fiscal and monetary policies, which should be positive for the Financials sector play.
We have been highlighting for the longest time that asset quality concerns are overdone and capital buffers are at their all-time best levels.
We believe that concerns on credit cost and liquidity are now largely behind and the focus would shift to loan growth. We do expect credit growth to pick up to 9-10% for the sector vs about 6% currently, which should be positive for the sector.
On IT, as mentioned before, we see limited room for earnings upgrades and see headwinds from potential depreciation of USD and potential curtailments in tech budgets of US firms if corporate taxes in the US are increased as proposed by the incoming US President: these headwinds along with peak valuations make us cautious on the sector.
Q) What are your expectations from Budget 2021? Do you think that FM will prioritize growth vs fiscal concerns?
A) We do think that the govt. will prioritize growth in the upcoming budget vs worrying about fiscal constraints. And, there are levers available to fund the growth impetus by the way of higher fiscal deficit at 5% of GDP in FY22, the potential introduction of Covid cess for high-income groups & other non-fiscal measures such as the use of RBI’s revaluation reserves, issuance of recap/infra bonds, government asset sales, etc.
On the expenditure side, we see the potential for step-up in allocation towards govt. infra capex- its share in the budget could revert back to 18% levels seen in FY17/19 from 16% in FY20/21.
We also think IEBR concerns are being overplayed and that there is room to expand gearing for govt.’s infrastructure implementing agencies from the current 43% (56% in FY17/19, 58% in FY13).
Other than the capex push, we do see some form of tax relief, at least to lower/middle-income groups, to spur demand growth. There could be sops for the real estate sector as well.
Amongst other key measures, we see the potential for the creation of ‘bad banks’, recapitalization of PSBs by 0.25-0.5% of GDP, expansion in MSME credit guarantee scheme, and continuation of some structural reforms- most likely in the form of breaking large government monopolistic sectors and/or the introduction of private/ foreign competition as outlined under the PSU policy in May 2020.
Q) How are FIIs viewing Indian markets in 2021 after pumping more than Rs 1 lakh cr in the previous year? Which sectors are the overweight and underweight on?
A) FII flows into India have been robust and that is a function of the excess liquidity globally along with robust earnings growth registered by Indian corporates.
We expect flows to remain positive on the back of strong earnings growth of 35 percent in FY22 for the Nifty Index and further 20% growth in FY23. FIIs are currently OW Financials and Energy, UW capex facing stocks like materials and industrials.
This is where we see the potential for re-positioning in favor of Industrials and Materials sectors, given our expectation of a step up in CAPEX cycle.
A) Yes, Make in India has been a theme we have been highlighting for most of last year and we think its momentum is likely to sustain in 2021. The PLI schemes of ~USD20bn approved for 10 sectors could see specific sector-wise details being rolled out- similar to the specific production targets and incentive details that we saw in the mobile manufacturing sector middle of last year.Besides, there could also be the inclusion of other items like LED TVs, laptops, etc. in these schemes. There could be some reforms on the land side, the land bank is already being set-up by many states, we could also see a policy on Port linked industrial clusters.Overall, it is a medium to the long-term theme and we will keep seeing some continued action on this from the govt. through much of 2021 as well.Q) Which are the key reforms you expect govt to take in 2021?A) The govt. has pursued a very targeted reform agenda over the recent years, beginning with GST/IBC 3-4 years ago to labor reforms, PLI schemes last year. We see the momentum of structural reforms continuing in CY21.
We expect the government to introduce legislation to reform the power distribution sector; stakeholder comments on the draft legislation for this reform has already been received.
As mentioned before, the Make in India push will continue. Besides, CY21 could see some progress on the Judicial & Election reforms and PSU/asset monetization and/or opening certain sectors for private/foreign investments.
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